When will the stock market bottom out?

At last the crash I had been waiting for such a long time seems to be here. I must admit the market remained irrational for longer time then I expected. But then it’s impossible to exactly time the market. By fundamental analysis you can just say what is logical and what is not. And now readers of my blog will admit that all I said is coming true.
Still doubt my capabilities? Lets have a bet on what would be the extent of correction of when can we say that the market has bottomed out. Game??
My bet is - the stock market will bottom out only after there is a steep correction in the real estate market. By steep I mean 40 – 50% correction!! We will see builders defaulting on loans and banks taking over projects. We will see few builders defaulting on their project commitment and customers running from pillar to post to protect their savings. We may see a couple of suicide or crime related to property prices crash.
People say analysts are generally not specific with their recommendations so that they have an escape route later. Well I will get as specific as possible. Running rate in Bandra East is Rs.12000 – 15000 per sqft and in Goregaon East is Rs. 8000 – 10000 sqft. Wewill see prices in Banda East falling to region of 6000-7500 per sqft and in Goregaon East to 4000-5000 per sqft. My bet is correction would be around 50% in these areas. And these are the prime areas – areas like Kharghar, other parts of Navi Mumbai will see steeper correction. People will realize that Airport, SEZ and Sea-link story are too far in future to price in today.
Logic: The logic behind it is simple. Cost of factors of production – Land, labor & capital has today become so high that most of the projects are intrinsically unviable. Specifically land.
The sunrise industry of this boom of 2005-2008 was – Real Estate & Retail, Airlines, Power and Financial Sector. Retail is already in losses. People are putting in more and more money in hope of future profits; same is the case with Airlines. 3 or 4 with deep pockets will survive rest will sell out or die. In real estate I have already mentioned that it’s all set for sharp correction. In power sector most of the upcoming projects have been based on fossil fuels. It’s a grave mistake and we will soon realize it. Financial sector has already seen correction world-wide and effects will be felt in India soon.
If the best earning guys take the maximum loan to finance their expenditure rather than investments the economy is in trouble and that what happened to India due to the consumerism rush. (note: car and house is expenditure and not investment). Salary corrections, job stagnation, no-bonus announcements will lead to lower future earning expectations and hence loan taking capacity. Added to this looses in the stock market and real estate market will make the customers/investors much more reasonable and cautious.
People say – India Story is intact. I too believe in India story but for that Indians need to invest & work hard not speculate. Last two years earning money had been so easy that people and started resisting working in their regular business with 12-15% return. It was a common belief that it’s better to put the money in stock market or real estate and earn 40-50% return per annum. Everybody can see the result now.
India story has been spoiled by our Mr. Bubble maker – Mr. P Chidambaram. Things which lead to current state are:
Zero capital gain tax: By having zero capital gain tax on long term capital gain from stock market Chidambaram forced common hard working people to ignore their jobs and businesses and rather speculate in stock market.
Forcing Indian Financial Institutions to invest in market to support prices: Not only he made these FIs weak he also created bubble in the market by not allowing periodic corrections
Tax benefits on house purchase and high income tax rate: High tax rates and rebate on house purchase forced people in their twenties to take up 20 year housing loan. A recipe for disaster.
Farm loan waver: Not only it added to fiscal deficit & made the banks weak it created moral hazard. Farmers and other borrowers will always look for waivers rather than paying up in time. Oil Bonds and fraudulent accounting practice: On the one hand he promised to keep fiscal deficit low and on the other hand “off-balance sheet” he dole out oil subsidy in form of oil bonds. Oil price is a difficult problem. But he should not be using such fraudulent accounting practice.
If you see all the 5 points above are clear case of living for today and spoiling the future. India Story can’t remain intact with such fools in power. (I had mentioned these points in my blog several time in the past, I hope in the changed scenario I am making more sense).
There have been other party spoilers like Anil Ambani, Real Estate players and these I-banks for the valuation game they played. But at the end of the day the rule is – “Caveat Emptor” – ‘Let the buyer beware’. It’s only we customers are to blame for falling in their trap and not looking at the fundamentals.
So, willing to take the bet? Tell me when you think the market will bottom out. My bet is after there is correction of around 40% in real estate market.

PS: Bottom out doesnot mean that market will see a ‘V’ shape bounce back after that. It would be ‘U’ shaped. It might take few years to go back to mount 21K again.

Has the Bubble Burst? No not yet

Readers of my blog know that I had been predicting burst for quite a while now. And to be very frank the current correction in the stock market can’t exactly be called a burst – it’s too soft a landing to be called a burst, it’s just a correction.

What is a “Burst?”

Burst is something that is followed with lot of pain for example:
1. Crash / Substantial fall in prices of all asset class including shares & real estate. (Has fallen a bit but not substantial)
2. Huge cash loss to speculators and erosion in value of portfolio (happened to an extent but still not at a scale as experienced during a burst. Generally lead to liquidation of long term assets to pay off. Even lead to couple of suicides).
3. Realization that many projects taken up in boom time are not actually viable. This generally happens when people bid more aggressively then one should actually bid (good examples may be Reliance Power’s Sashan Project, Reliance Energy’s Sewree – Nava Seva Sea-link, IPL etc.). Many projects get scrapped, delayed or ‘restructured’ after burst.
4. Fall in prices of factors of production – Land, Labour and Capital. (Currently cost of capital and land has corrected a bit but labour cost is still moving north).
5. Inability to pay debts relating to housing loan etc. This is generally accompanied by lack of willingness to pay because of substantial fall in market value of property. (It has happened in USA but not yet in India)
6. Another remarkable feature of all burst is fall of something which was considered in fallible. For example: big companies like Enron, Worldcom etc. (This time it might be one of the big banks like – Citibank.)
7. Growth engines hitting the wall and come down crashing – this bull runs growth engines have been – Financial engineering (banks), Real estate prices and Power sector. Crash should be more evident in these sectors.
Again the Piped Piper of the last two bull runs were Harshad Mehta and Ketan Pariekh – this time it’s Anil Ambani. Anil Ambani’s fall from grace can lead to end of Bull Run. Last two bulls used ‘not so legal methods’ to use Banks cash to manipulate the market. This time it might have been cash from Mutual funds through ‘not so legal methods.’ International banks financial engineering (read sub-prime) is of course there.

So what are the factors which should be looked forward to which can accelerate the pace of correcting into a Burst / Crash.

1. Coming to light of ‘not so legal’ means of using public money (mutual funds / banks) by certain individuals to manipulate the market. Mutual fund is a big risk area. General public is not following the basic ground rule of investing – ‘Never invest in something you don’t yourself understand’
2. Impending elections in two of the biggest democracies of the world and sudden realizations things are not as stable in terms of policy etc as it was assumed to be
3. Realization that many of the declared or bid for project are not actually viable at these prices
4. Sudden change of policy or tax rules (for example currently stock market earning are almost tax free – Short term capital gain (STCG) attracts only 10% tax rate with Long term capital Gain (LTCG) is tax free. Dividend is tax free in hands of shareholders and Mutual fund investments attracts tax benefits under section 80C – It’s almost perfect for investors and as Aamir Khan said in Dil Chahta hai – it’s difficult to improve something which is already perfect. So tax changes most probably would have negative effect. Even decrease in tax on other avenues of savings like for fixed deposits would have negative impact on stock market due to flow of money to other avenues.)
5. More glaring sub-prime related mess in the international economy
6. Fall of a heavy weight (like Citibank etc)
7. Crash in real estate prices and Oil price fluctuation
8. Currency adjustments – ( change of parity in important currencies like Chinese Yuan & American Dollar)
9. Decease in capex by China. China the world's growth driver would breathe a bit easy with Capital expenditure after the Olympics. This would slow down demand for Steel, cement, and construction goods around the world.

New game at Dalal Street

The Bubble Maker’s (Mr. Chidambaram) decision of making long term capital gain tax free has led to another black to white game at stock market. Here is how it’s played.

Origin:

As you all must be knowing that all Long term capital gain is 100% tax free while short term capital gain is charged to tax @ of 10% only. How can a government that came to power by advertising itself as the Messiah of “AAM ADAMI” can be so against the “AAM AADMI”. In today’s tax regime speculators and gamblers are not supposed to pay tax on their winnings while people who work hard to earn their living are supposed to pay 30% tax on their hard earned money. Hence even people who used to work hard has joined the speculation and gambling bandwagon. Mr. Chidambaram, are you getting any cut from these stock brokers / promoters etc?

Structure of Play:

The operators in the market search for stock which has limited liquidity (stock in which public holding is very less and most of the stock is locked with promoters). Then they collude with the promoters. Operators inform the promoters of their intention to play in the stock and requesting them not to start selling their promoter stake in open market. Now the operators slowly and steadily pick up substantial chunk of the stock from the open market leading to reduced liquidity and buzz around the script. They start buying aggressively at very high price in small lots creating a frenzy in the market leading to small investors entering in the stock. The small investors who are feeling foolish to have missed out on the Bull Run rush to buy the share and lead to further increase in price.

Once price have increase to 2x – 3x of the original price promoters transfer their original holding in the company from one holding company to another. In the process the original holding company makes substantial Long term capital gain which is not taxable. Hence promoters are able to build up substantial white money in their books. This also help promoters who have black money parked outside India get this money back in India in this falling dollar regime.

Gainers:

a) Promoters
1. Able to convert his back money in white money without paying any tax
2. Able to create enough white money in his accounts even if actually he doesnot have the money (super money). This helps in showing promoter contribution in new projects. (Most of you must be aware how promoters escalate the project cost in business plan to get large amount of bank finance and their actual equity contribution is nil).
3. If the promoter is planning to come up with FPO / right issue / IPO for subsidiary or a group company / share swap for takeover etc increased valuation helps.
Promoter can now raise higher bank loan by pledging shares help by second promoter company. As the cost price & market price of these shares is much higher, banks are willing to provide higher loan against higher valuations.

b) Operators
Operators cash out by selling the shares they accumulated at lower price, at high price making substantial short term capital gain. (People must be aware how these days short term capital gain transactions are being traded between businessman who want to convert their black money into white by paying minimal tax and operators who don’t want to pay any tax. These businessmen show these transactions in their own books and pay 10% short term capital gain tax. Rest 90% becomes their white money. They save straight 20% in tax (30% - 10%) which otherwise is payable for business income. On the other hand these operators are not even required to pay 10% tax as the transactions are made in others accounts).

Losers:

Small shareholders: Small shareholder fearing missing the train buys shares at all price and hold on to it once operators have left believing those shares are really worth that much.
Government of India: Huge revenue loss. Everyday we read newspaper where experts calculate and show the expected revenue loss due to tax benefits provided to SEZ. Why no expert provide a figure to the revenue loss suffered due to charging capital gain at 0% or 10% tax rate instead of 30%?

To test the above theory, try to see the market behavior over last couple of years (since capital gain tax laws have changed). Look at those scripts that have increased the most during this time. And look at the movement of promoter holding between various companies of the promoter. Look at the amount of loan raised against the pledge of shares by promoters. I am sure you will find the connection. Another good test would be whether promoters have made these transaction through market or off market. Capital gain tax advantage is applicable to only market transaction. I cant think of any other reason to do a market trasaction for promoter share reorganization as due to STT its works out costlier than off market transactions.

Probable example:

Reliance: Due to separation of Ambani brothers both group has ‘reorganized’ their shareholding structure. They have done away with the maze of holding companies and have made it more transparent. This entailed several transaction of transfer of shares from one holding company to another. Can anybody work out amount of white money created in the process.

Essar: The group has done lot of reorganization over the past two years. It has also raised substantial loan by pledging promoter holding in various companies. And the Essar Oil and other group stock prices sky rocketed in a very small span of time recently. Smells fishy.

Well, this is just food for thought. Please do let me know your arguements if you believe the above is not possible.

Open letter to the Finance Minister – Mr. P Chidambaram (the bubble maker)

Dear Sir,

Recently I read you comment “The rather steep rise in Sensex sometimes surprises me, sometimes worries me”. Well sir, I hope you realize that this bubble is of your own making and with such comments you can’t absolve yourself from being held responsible if there is a burst in near future.

Recently there were also media reports that you have asked bankers to review interest rates downwards as it is hurting demand and growth.

Sir, both the problem (steep rise in Sensex and rising interest rates) are result of a ‘market friendly’ tax policy you announced few years back. Since then stock market is moving in only one direction and you have received lot of credit for that but now need to look deeper.

By removing Long Term Capital Gain (LTCG) on equity market deals you have made investment in stocks as the only viable savings & investment options for tax payers who fall in higher tax bracket.

If an investor invests his savings in fixed deposit he has to pay income tax of around 33% while an investor who investor who invests in stock needs to pay nothing (apart from negligible around 0.4% STT) on capital gain made on stock. Hence small investors who are not very open to equity market risks are also forced in to invest in equity market as bank fixed deposits offer rate or return equal to inflation rate (9% less 33% tax = 6%).

Sir, in interest of protecting small taxpayers who would prefer to invest their savings in risk free fixed deposits I request you to have “level playing field” for both the investment options. You are requested to make interest on Fixed Deposits (FDs) tax free if period exceed 1 year same as the case with equity investments.

This will solve the following purpose:
It will make deposits cheaper for banks and hence lead to reduction in lending rates
There would be a healthy correction in the stock market to more realistic levels
Society / small & venerable investors would have a safe investment option which is not tax unfriendly

I hope you will look beyond your favorite kind (stock market) and stop this step-motherly treatment to other saving options.

Regards & Thanks,

Neeraj Gutgutia

M: 9867614375

Stock market - The burst is inevitable

The Indian stock market is having a dream run and it had made people believe that all is fine with the India economy. But I have a different view. I believe that this stock market rally is not sustainable and fundamentals donot support such a rally.

Lets check the fundamentals.
Oil & Gas - Crude oil prices have doubled over a period of one year and no respite is expected in near future. Indian PSU oil companies are taking a hit. Navratnas are going red and this is not sustainable. I agree with Swaminomics that’s spiraling crude price is not as bad as what it was a decade due to increased importance of services and relatively less impact on inflation. But still the inflation is under control because government has not passed the price rise to consumer. But sooner or later they will have to do that and then...inflation will rise.
Foreign currency position is in bad shape if you ignore the hot & unreliable FII money coming to Stock exchanges. Trade balance position is of concern due to heavy dependence on crude imports.

Power – Power reform is dead. Delhi privatization was always a problem, as it did not lead to competition but guarantee of 16% return to a private company rather than PSU. Most of the proposed power plants plan to use gas as feedstock. Now with oil prices spiraling gas prices has to follow them and this will make gas/naphtha-based power plants unviable. (Mr. Anil Ambani I told you earlier through my blog that focus should be on power distribution and transmission rather than generation). Dhabol settlement is another recipe for disaster (read BW cover story for details)

Telecom – FDI and ADC issue is still unresolved. As I told earlier, next big jump in telecom when ADC policy is changed to percentage of revenue rather than per minute basis. Nothing has changed yet. Added to that spectrum issue is unresolved which is holding back capital investments

Roads & port– Its happening but not at the speed it was happening during BJP’s rule. Congress has focus on port, but something concrete is yet to happen.

Airlines – Yes this is a revolution in making. But this too can get badly affected by oil price rise. Fate of the Mumbai & Delhi Airport modernization would be a good indicator or this sector. Lets wait and watch.

Steel, cement, coal & other commodities - Prices are at all time high making new capital investment very costly

The point I am trying to make is that there is nothing that justifies the kind of rally that we are experiencing now except the ‘hot & unreliable’ money coming from abroad. The problem is this money will go off as soon it came. The burst will create its own negative spiral that will pull down economy when it doesn’t really deserve

Stock market Burst ------- fall in confidence -----fall in capital investments ---fall in prices----fall in income---fall in demand----fall in capital investments

Reliance Infocomm - Buy

Reliance Communication Ventures - The Reliance group holding company for Reliance Infocomm, Reliance Telecom, FLAG, Reliance Communication Infrastructure Ltd and all other Telecom related ventures will be automatically listed on the stock exchanges soon.

Ambani brothers have valued it at Rs. 32 per share for their family settlement but it s worth much more. My target price for the same is Rs. 250 in 24 months from now. I believe it will list somewhere around Rs. 100 when it get listed. Oppurtunity to make 2.5 times in 2 years ...not bad isnt it.??!!

My suggesting buy as many shares of RCV as you can afford at any price below Rs. 100 and sleep over it for 2 years. I am open to the idea of sharing or risk and return if anybody is interested - interested??